Wednesday, October 14, 2015

One year into the current administration

The IDR has been pummeled

So I attended a talk given by a prominent Indonesian economist and stock market strategist, who shall remain unnamed -- I'm mindful of the government's war on research analysts.  Perhaps our leaders believe the key to growth is to have all analysts gather and sing songs instead of doing their jobs: making constructive independent analyses.

Anyways, needless to say, the speaker was utterly disappointed in how the new administration have fared in the past year.  The indicative metrics are the underperformance of the IDR and the bond markets.  The president claims that the downtrend is caused by external factors and that people need not worry, but fact is that investors are losing patience and confidence.  See, in most (developed) markets, bond prices are inversely correlated with equities -- if equities go up, investors switch away from bonds.  Not in emerging markets like Indonesia: both securities are inversely correlated with the IDR.  In other words, both Indo bonds and equities fall when the IDR is under selling pressure.

Let's take a closer look on how the government is responding to the economic conditions of late.

Point 1 - Imposing Rupiah use in economic activities. 
This is a (relatively mild) form of capital controls, in order to boost the market for the domestic currency;  harsher measures are usually implemented by countries in severe crises such as Venezuela or Greece, or by countries that are not fully integrated with world markets, like China.  The impact would likely only weaken the currency -- the exact opposite of what it's intended to do.  Why? Because Indonesian corporates owe money in USD.  This isn't going to change, as long as Indonesia still needs a lot of FDI, and domestic funders and bank sector remain too small and limited.  Some of these corporates have been receiving some of its revenue in USD denomination (such as rental income, export-related revenue, etc).  With this new regulation,  revenue which was previously received in USD, will now be received in IDR.  When interest or principal payments fall due, these corporates will need to convert their IDR into USD to service these debts.  In the end, corporate treasuries unwillingly become currency speculators, spending resources figuring out FX movements instead of benefiting from natural hedges.   According to the current administration, this is progress.

Point 2 - Increase in taxes. 
They said they want to promote more activities in the property sector.  Well, in the context of economic slowdown, an increase in taxes will make land titles more costly. This is a truism and not an argument.  One may argue they are only increasing taxes in the high-end, keeping space for the affordable segment; however, without fiscal spending or subsidies it's not going to make a dent.   People are still losing buying power due to inflation and cost pressures.

Keynesian bulls may believe that the government need to increase taxes to fund expansionary fiscal policy.  They argue that China has made a killing with massive fiscal stimulus, and and we should follow the path.  Indeed our debt-to-GDP levels remain low -- but we also need to learn the lessons of (recent) Chinese history.  With a bigger government comes bigger corruption.  And massively misdirected incentives. Massive buildup of excess unused capacity.  And bigger chance of revolutionary social upheavals when the tide turns against it.

Point 3 - Social contract trumps everything else.
Indonesia has seen its president promoting social contracts -- popular sound bites that undermine long-in-place legal commitments.  I'm talking about lowering tollroad fares during the heaviest Idul Fitri travel season; lowering cement priceslowering natural gas prices, and so on.  Never mind that tollroad operator Jasa Marga, cement producer Semen Indonesia, gas utility Perusahaan Gas Negara, and numerous other affected companies are publicly-listed big caps that spent 10 over years to build their reputation among international investors.

So what the president is saying is "we don't need your stinking FDI."

This is who we voted for, a far-left leader undoing the hard work of the past several decades.  

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